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Q1 2024 - (released May 2024)

SA's quarterly Private Equity & Venture Capital magazine

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From The Editor's Desk

by Michael Avery

A column, published in Business Day by eminent professor of economics and head of the research institute at Investec Wealth & Investment, Brian Kantor, caught my eye. His analysis, that private equity principals are the new titans of Wall Street, starts to lift the lid on the Pandora’s box of what he calls “high-fee paying, internally valued and illiquid private investment strategies.”

So let's lift the local lid off the secretive Private Equity (PE) world to examine what's really inside the black box. The PE industry, often veiled in a cloak of exclusivity and high returns, presents itself as the ‘Holy Grail’ for savvy investors seeking to diversify and enhance their portfolios. But is this image rooted in reality, or is it merely a well-crafted illusion?

For starters, the investment industry is no stranger to the fanfare that accompanies success. When a fund performs well, its managers shout it from the rooftops, employing every medium at their disposal to ensure the world knows about their achievement. Conversely, underperformers are swiftly swept under the rug, their existence barely acknowledged. In such an environment, the PE sector proclaims itself a beacon of higher returns and lower correlations, a purported panacea for the risk-averse investor. Yet, if this were the case, why does the South African PE industry manage a relatively modest R200bn? This discrepancy begs the question: Is the PE sector truly delivering on its promises, or is it time for a re-evaluation of its value proposition and business model?

Transparency, or the lack thereof, is a glaring issue within PE. Unlike their more transparent cousins, the unit trusts and ETFs of this world, which lay bare their performance data and investment fees for all to see, PE funds often operate in the shadows. My own efforts to unearth performance data have been met with disappearing online fact sheets and a conspicuous absence of crucial information on investment returns and fees. This opacity raises eyebrows and suspicions alike. Why the secrecy, unless there's something to hide?

The Southern African Venture Capital and Private Equity Association's (SAVCA) 2023 report, while rich in 60 pages of industry analysis, astonishingly omits any concrete data on performance and fees. This omission could be interpreted as a strategic move to drown the public in information while withholding what truly matters, or perhaps it's an unfortunate oversight. Either way, it does nothing to quell concerns about the integrity of PE fund performance, a topic that has garnered scrutiny in the United States as well.

Given the lucrative remuneration structures within PE, where managers enjoy hefty fees and a share of the profits, it seems only fair to demand a level of transparency and accountability akin to that found in the unit trust industry. After all, with great compensation should come great responsibility, especially when managing the retirement savings of the public.

It's time for the PE industry to step out from behind the curtain and show us the money. Only through reliable, regular and transparent reporting can we truly assess the value and performance of PE as an asset class. Until then, investors and pension funds will continue to tread cautiously, armed with a healthy dose of scepticism.

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